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Thursday, July 09, 2015

On Extractive Industries, Societal Development, and The Looting Machine...

I have long argued that the fact that Nigeria's government earns a huge chunk of her income from extractive industries (think oil) and not tax (and other IGR) means the government has less of an incentive to fulfill the social contract with the governed. A government (Federal or State) that relies on taxes for the bulk of its income is incentivized to grow the state's economy by making it easier for citizens to generate wealth (and employment) by doing business. Intellectual and physical property rights, transportation networks that work, security, cheap access to a steady power supply, and other such factors that support business growth will follow naturally when a government actually needs the people to survive.

One of the central themes of Why Nations Fail is that economic prosperity depends above other factors on the inclusiveness of economic and political institutions. Extractive systems tend to lend themselves to autocracies, as a connected few that control the means of extraction can unfairly enrich themselves and setup high barriers to entry for the majority of the population.

I've recently started reading The Looting Machine, and here's how Tom Burgis puts it; more concisely and succinctly I must say.

"...But more often than not, some unpleasant things happen in countries where the extractive industries, as the oil and mining businesses are known, dominate the economy. The rest of the economy becomes distorted, as dollars pour in to buy resources. The revenue that governments receive from their nations' resources is unearned: states simply license foreign companies to pump crude or dig up ores. This kind of income is called 'economic rent' and does not make for good management. It creates a pot of money at the disposal of those who control the state. At extreme levels the contract between rulers and the ruled breaks down because the ruling class does not need to tax the people to fund the government - so it has no need of their consent.

Unbeholden to the people, a resource-fuelled regime tends to spend the national income on things that benefit its own interests: education spending falls as military budgets swell. The resource industry is hardwired for corruption. Kleptocracy, or government by theft, thrives. Once in power, there is little incentive to depart. An economy based on a central pot of resource revenue is a recipe for 'big man' politics... resource rents concentrate wealth and power in the hands of the few..." - The Looting Machine.